I was asked recently to put together a short presentation to a group of lawyers that don’t regularly work with nonprofit organizations and highlight some of the most important issues so they can at least flag them as potential issues if a client asks them about it, if they are serving on nonprofit boards, or even just when they are talking to their neighbors. I might re-order them differently depending on the day you ask, but below are the top ten nonprofit-specific issues I see (nonprofits are businesses, so they also have plenty of other issues that affect all businesses, like whether someone is an employee vs. independent contractor).
10. The term “nonprofit” is really a catchall term; it is an entity choice, not a tax status. Being a nonprofit just refers to the statutory corporate law that applies (vs. a corporation, LLC, etc.). Nonprofits can be tax exempt in a variety of ways, and may even be taxable.
9. Sales, property, and income tax exemptions are all separate things and must be applied for separately. Income tax exemption does not necessarily mean that an organization will get sales and property tax exemptions.
8. Organizations have to understand that federal tax law imposes limits on lobbying and political activities, those limits change depending on what type of tax exempt organization the nonprofit is, and federal tax law limits are very different than campaign finance law regulation.
7. The phrase “fiscal agent” should strike fear into your heart. A fiscal sponsor is an established IRS 501(c)(3) tax-exempt organization that agrees to accept donations on behalf of a group that does not have IRS tax exemption. Misuse of the term can indicate that the structure of the relationship may also be a problem (fiscal sponsorship gone wrong can result in tax fraud). True fiscal agency doesn’t apply very frequently.
6. Charitable gambling activities are heavily regulated with a multitude of limitations and rules. It is even illegal in some states, so nonprofits must proceed with caution. If not done properly, even holding a raffle can lead to unintended consequences for donors and charitable nonprofits alike.
5. Multi-state fundraising, like crowdfunding, is regulated differently by most states and requires separate registration and reporting in a majority of the states, including triggering the need for an audit even if your home state does not require an audit.
4. Working with for-profit businesses as a part of fundraising, often referred to as commercial co-ventures/cause-based marketing activities, can be a trap for the unwary. We don’t specifically regulate this in Minnesota, but it is highly regulated in some markets and following best practices is recommended.
3. Transactions with insiders are scrutinized and may cause problems under both Federal tax law and State law governing nonprofit organizations. Properly managing transactions with insiders is a must – this includes reimbursement arrangements.
2. Tax law is implicated is much of an organizations activities and is really important to pay attention to if a nonprofit is a tax exempt organization. With for-profits, all the IRS really cares about is that you pay your taxes, properly classify your employees, and comply with the ACA where required. For tax exempt organizations, the IRS cares about who is on the board, how many people are on the board, whether those people are related, who the organization does business with, whether they sell services or widgets (and if that is taxable), how much compensation they pay, etc. Way more complicated.
1. Tax-exempt organizations are generally subject to a much more significant level of public disclosure/public scrutiny than the average business – so, the court of public opinion really matters and publicly disclosable documents (including annual returns to the IRS) should be viewed as PR/marketing materials.